CMHC GOING IT ALONE
Industry reports some buyers acting now to avoid higher down payment criteria
Private insurers reject lead
New rules tightening borrowing for homebuyers recently announced by Canada Mortgage and Housing Corp. may not end up having the teeth they were intended to have now that private sector competitors have indicated they will not follow suit.
“It’s very unusual and actually unprecedented that the two private insurers … basically said, ‘You know what? We’re not going to do that,’” says James Laird, co-founder of Ratehub.ca and president of mortgage brokerage Canwise Financial.
Earlier this month CMHC announced it was tightening its underwriting criteria, starting July 1, for default mortgage insurance for buyers with less than 20 per cent for a down payment on a home. The Crown corporation cited concerns about the ongoing economic effects of COVID -19 leading to more mortgages in arrears and foreclosures.
Yet within a week, CMHC’S two private sector counterparts — Genworth Financial and Canada Guaranty Mortgage Insurance Co. — have both stated they will not institute similar changes.
The changes are intended to reduce the risk of buyers becoming overextended, the CMHC stated in a news release in early June.
The changes include reducing the percentage of gross income spent on housing costs from 39 per cent to 35 per cent, often called the GDS (gross debt servicing) ratio.
As well, the amount buyers can borrow, while including other debts like car loans as a percentage of gross income, will decrease from 44 per cent to 42 per cent, commonly referred to as the TDS (total debt servicing) ratio.
Those changes effectively mean buyers with less than 20 per cent down payments will be able to afford about 10 to 12 per cent less after July 1 than they can today, says Matt Leggett, senior vice-president at Canwise Financial’s Calgary office.
“I did a comparison for a couple of clients, and it’s upping their cost by $50,000, which is a huge difference when you’re looking in the $450,000 to $500,000 range.”
Another change involves raising the credit score minimum from about 620 to 680, which affects many first-time buyers, Laird says.
The CMHC changes left many in the industry confused, says Tim Jones, broker/owner of Re/max Prime in Calgary. “It is hard to fathom ‘Why now?’”
He further notes many realtors are expecting — and starting to see already — a rush to purchase before the change occurs.
That said, news CMHC’S private sector competitors will not change criteria is a welcome development, he adds.
Tom Shearer, broker/owner of Royal Lepage Noralta Real Estate in Edmonton, says he understands CMHC’S motive.
“I think they’re definitely trying to manage affordability and are really concerned about overheating, and what it means to be a first-time homebuyer, and getting those people into the marketplace.”
But he’s unsure of its intended effect. In the last few days he has heard from his agents that on-thefence buyers are now deciding to buy before the end of the month.
Even without the announcement, the heart of the market — single-family detached homes — has seen strong demand of late, says realtor Beverley Hasinoff with Liv Real Estate.
“Currently in Edmonton and the surrounding area, we are seeing multiple offers on detached single family homes under $450,000,” she says, adding the $300,000 to $400,000 segment has about three months of supply.
And while Genworth and Canada Guaranty are not changing their rules, she cautions lenders may tighten up criteria all the same.
Laird further notes what may happen after July 1 remains uncertain, given the other insurers usually match CMHC. “I don’t see a scenario where (CMHC) doesn’t lose almost all its business.”
He speculates further the federal government could institute rule changes forcing the industry into tighter lending practices, similar to the mortgage stress test rules.
Even with tighter rules, Leggett notes lower mortgage rates and lower home prices should still provide buyers with plenty of options.
“Things may seem kind of up in the air,” he says. “But there is lots of inventory in Alberta right now.”